Can playing tunes online pay on the bottom line?

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NEW YORK -- Internet radio generates excitement, but it's not making much money. And that will remain so until broadband connections expand and business models mature, say industry experts and panelists at Jupiter Communications Inc.'s Plug-In music and Internet conference here.

Internet radio sites such as Spinner.Com, Tunes.Com, SonicNet and NetRadio now seek several revenue streams, including:

  • Linking to e-commerce sites that sell music, such as Amazon.com, and through affinity network programs that pay a slight fee for purchases made through links.
  • Selling CDs, digital downloads and merchandise.
  • Advertising, either with banners on the Web site or audio advertisements embedded between songs.
  • Selling subscription services.

Competitive challenge

Still, many struggle in a highly competitive market. Competition is heightened because the market has few barriers to entry, especially when compared with traditional radio broadcasting with its Federal Communications Commission rules and expensive transmission towers.

The good news about streaming audio is that it offers some advantages over traditional radio broadcasting.

Radio airwaves can take only a limited number of niche listening tastes, but Internet radio can provide as many channels as there are music genres. Spinner.com, for example, has 128 channels, according to company CEO David Samuel.

Listeners can create their own channels and personalize their Internet radio. Imagine Radio and SonicNet -- both recently purchased by MTV -- have led the way in offering visitors the capability to program their own channels.

By pairing sophisticated Internet tracking tools and niche broadcasting, Web sites can deliver precise psychographics to Internet radio advertisers and brand marketers. In turn, they can provide more targeted messages.

Traditional radio is local; Internet radio is international. Big-name national and global advertisers enjoy greater reach on the Web. Traditional radio advertising typically offers 20% national and 80% local ads, according to Gerry Boehme of Katz Media Group.

Increasingly, listeners of online streaming music will be able to buy music when they hear it. Radio listeners, on the other hand, often aren't even told the name of the song on the air, fumble to find a pencil and, in the end, can't find the music when they get to the retail store.

The workplace as a listening venue is opened up by Internet radio. More people are likely to listen to streaming music over headphones, rather than turn on a traditional radio receiver that could disturb other workers.

In search of bandwidth and profit

But Internet radio faces some significant hurdles before it becomes a viable business. The first problem is limited bandwidth. In this case, it refers not only to the listener's pipeline, but also the number of streams a server can deliver from a Web site broadcast at any given time.

The Internet back-end system itself is constrained. Fewer than a million people can hear online radio at any given time, estimates Joe Pezzillo, who attended the Jupiter panel discussion and is the founder of Eclectic Radio's GoGaGa station. "It would max out the Internet if everyone triedd to listen to all Internet radio sites at once -- Imagine Radio, all the ShoutCast servers, Spinner," he says. "Multicasting would be a partial solution but has been slow to develop by the telephone companies and others in the business of selling bandwidth because it's less profitable for them."

Another problem is competition. With such low barriers to entry, practically anyone can start an Internet radio station. That dilutes the audience, making it harder to aggregate enough listeners to attract advertising dollars or survive on the subscription model of revenue.

But new revenue models are developing and are expected to grow as the back-end bandwidth problems are solved. For example, advertisers now typically pay based on click-through rates. Katz Media's Boehme suggests a more finely tuned model in which advertisers pay not only for transactions, but also for "awareness" and "consideration." That is, consumers sometimes buy online after seeing advertising and marketing messages over a period of time.

Another option borrowed from TV, pay-per-view, is relatively new but may work for Internet radio Web sites with original content. Last week, The House of Blues (HOB) broadcast a live 90-minute Ziggy Marley concert from its Chicago club as a technology and marketing test. Using alpha software jointly developed with Microsoft Corp., HOB.com transmitted free to listeners connected at less than 100K bit/sec. It charged $4.99 per hour for 300K bit/sec. and faster connections, which also received full-screen video.

"The trial had one or two glitches, but basically it worked well and heralds a breakthrough in our business model," says Chris Stephenson, HOB senior vice president of marketing. "It told us that we can make money out of the concerts in our archives." HOB plans six more pay-for-view trials in August and September.

Internet sites with novel content might be able to offer music, video and services on a membership model, such as used in public television, suggests GoGaGa's Pezzillo.

"As long as a Web site's content was differentiated from what anyone else offered," he says, "a listener-supported membership model might work."

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